Of all the tremors being felt in Tokyo, Masaaki Shirakawa is experiencing some of the biggest.
The Bank of Japan head is under greater pressure than any of his predecessors over the last 20 years to get radical. With Japan facing the triple whammy of an earthquake, tsunami and nuclear crisis, Shirakawa is getting shouted at from every direction to bring the BOJ back to the 1930s.
He must tread carefully. Wherever he takes monetary policy over the next 12 months, the BOJ is likely to be shackled with those decisions for the next 12 years. It’s said that central banking is about gradualism. In Japan, it’s glacialism. Even when Japan was growing in the 2000s, the furthest the BOJ got interest rates from zero was 0.5 percent. Then, back to zero.
Japan has three paths to revival. One, issue loads of debt that may prompt credit downgrades and raise taxes. Two, dump its $886bn of US debt, destabilizing the biggest economy and enraging a key ally. Three, get the BOJ to monetize public debt. Not surprisingly, lawmakers like what’s behind door No. 3.
Shirakawa become governor in April 2008 – talk about baptism by fire. That was just after Bear Stearns Cos. blew up and Lehman Brothers Holdings Inc. was about to. The phrase “Lehman shock” has great resonance among Japanese who watched contagion rush from Wall Street to Tokyo in the financial equivalent of a tsunami.
These days, economists are more concerned about the “Fukushima shock” at the heart of Japan’s worst postwar crisis. And Shirakawa faces the challenge of a lifetime: balancing demands to take Japan further into uncharted territory today and to ensure financial stability tomorrow.
Things get mighty disorienting during crises. Remember that in 2008, the Federal Reserve effectively bought Bear Stearns for JPMorgan Chase & Co. The odds favor Shirakawa also acting unconventionally. Since the quake, the BOJ has pumped hundreds of billions of dollars into the financial system. Expect it to face demands to buy up everything from bonds to real estate to stocks as economic news darkens.
Forecasters have only just begun to mull the countless knock-on effects from nuclear reactors leaking radiation into the skies. This will not be a good year, no matter how many construction projects get underway in the devastated northeast. The Fukushima fiasco increases the odds of a third “lost decade” of stagnation and deflation.
The responses to Lehman were doctrinaire. The BOJ added yen to the economy, the government loosened fiscal policy and Japan’s business lobby hit the airwaves to boost confidence. The Fukushima crisis is far more complex, not least because there’s an almost indefinite quality to it.
There’s no way to assess how many Japanese ships and cargo planes will be turned away in the months ahead. Never mind that radiation traces found in milk in Washington state or cabbages in Singapore are miniscule. The science loses out amid the powerful psychology of radiation scares. Look no further than how fast Hong Kong hotels took sushi off menus.
There’s no goalpost to measure how the nagging risks of earthquake aftershocks and reactor leaks will hit business and consumer spending. There’s no way to calculate the “fly-jin” factor — how an exodus of foreign talent, or gaijin, that may never return affects an economy that’s long needed more of it.
Nor is the international picture bright. US growth is tentative, Portugal is the latest focus of Europe’s debt crisis, Chinese inflation is heating up and Libya is in chaos.
Even so, the intense focus on the BOJ is misplaced. Quantitative easing didn’t end deflation. What makes us think fresh bouts of it suddenly will? Japan’s problem isn’t the supply of yen. It’s that investors and households lack enough confidence in the economy to do anything with BOJ-created money. If the BOJ goes too far, Japan’s bond market could collapse.
Lawmakers want the BOJ to make 1930s-style purchases of government bonds to fund quake-rebuilding efforts. Shirakawa argues it would undermine the yen and could occur only in extraordinary circumstances with the permission of lawmakers.
Diet member Kozo Yamamoto speaks for many when he asks: “If this isn’t a special situation, what is?” He advocates a 20 trillion yen ($242bn) reconstruction program funded by BOJ debt purchases, and he’s hardly alone.
If only things were that simple. Yamamoto hails from the Liberal Democratic Party, which ran Japan for 54 virtually uninterrupted years until 2009. It browbeat the BOJ into the zero-rate policies for which Japan is notorious globally.
It also coddled Tokyo Electric Power Co., which runs the Fukushima reactors, for decades as Tepco falsified safety reports and underestimated risks. Now, the LDP wants the BOJ to do more as lawmakers do little. It’s the job of leaders, not unelected central bankers, to forge a road to revival.
Add Prime Minister Naoto Kan’s Democratic Party of Japan to the list of those nudging the BOJ to act. As Shirakawa navigates the political gauntlet, he must remember that the fallout from his actions will be with Japan long after Fukushima goes quiet.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)